1031 Receiver Recovering Lost Funds

A couple of recent news reports from Las Vegas indicate that former clients of Southwest Exchange may receive a substantial portion of their 1031 exchange funds. Jeff German of the Las Vegas Sun reports that as much as $91.7 million of the $97.5 million previously thought lost has been recovered through settlements with insurance and banking partners of the firm.

This is a remarkable sum considering how it appeared almost two years ago. Reportedly, Southwest Exchange acquirer, Don McGhan, invested nearly half to purchase a breast implant manufacturer and spent millions more to support his lavish personal lifestyle.

Of course, the news is tempered. As much as 25% of the money could go to attorneys that assisted in obtaining the money. Also, those taxpayers did not receive any relief from the IRS on the capital gain tax that they were required to pay (since their exchange could not be completed within their original 180 day window). Still, the news is much more favorable than anticipated and much better than what the latest is on the 1031 Tax Group/Ed Okun scandal.

As we've highlighted before, the central theme to both these issues (as well as the recent Summit 1031 Exchange failure) is the borrowing of monies that were placed in trust for clients into closely held and irresponsible, or downright fraudulent, investments. Both McGhan and Okun were acquirers who found a way to loan themselves millions of client exchange funds. Summit was owned by a sponsor of Tenant In Common Interests that was loaning its client funds to the parent thereby allowing it to leverage real estate.

Recent provisions in California, and now pending in Colorado, will make this activity illegal. No longer will Qualified Intermediaries be allowed to "loan" funds to an affiliate. This is an important element in all these unfortunate scandals. By providing sensible legislation that protects the client and allows ethical Intermediary firms to do business cost effectively, California and Colorado are taking the lead in protecting consumers and business alike.